Tenants-in-common real estate investments (“TIC”) are a more than $1-billion a year industry. However, with all innovative investment products, TIC investments receive their share of complaints from unhappy investors who bought them through a private placement. In FINRA arbitration, these complaints materialize as suitability claims and allegations of negligent misrepresentation. Usually, one or more of the following claims are made:
- Investing in a TIC was not appropriate for me because of my needs, experience, or risk tolerance.
- My broker did not perform adequate due diligence on the,offering materials of the TIC, appraisals of the underlying properties, persons promoting the TIC.
- My broker did not reasonably monitor subsequent developments with the TIC.
TIC investments are considered securities under the federal securities laws as they fall within the definition of an “investment contract.” See Securities and Exchange Commission v. W. J. Howey Co., 328 U.S. 293 (1946) (an investment contract is an investment of money in an enterprise, made with the expectation of profit arising from and dependent on the efforts of others); 15 USC § 77b(a)(1). Generally, TIC investments are a popular way for a seller of income producing real estate to defer paying capital gains taxes on the sale of that property. Section 1031 of the Internal Revenue Code allows the property seller to defer by exchanging their property for an undivided interest in a pool of properties formed by similarly situated investors. The TIC interest may then be resold to new investors in a private placement. Usually, brokerages will promote these transactions to clients because of the high commissions they receive from the sale.
The market collapse in 2008 adversely affected TIC market as the value of real estate dropped precipitously. Since the collapse, popular firms promoting TIC investments such as DBSI, Inc., Cap West Securities, Provident Royalties LLC, Medical Capital Holdings and Pacific West Securities have dissolved amidst a wave of million dollar customer lawsuits and parallel enforcement actions. Recently, a FINRA arbitration panel awarded an elderly couple $1.4 million in compensatory damages against LPL Financial, LLC for their role in promoting TIC investments.
FINRA classifies TIC investment as a non-conventional investment (“NCI”). Because of their unique nature, TIC investments may be significantly less liquid than traditional investment products. Following FINRA rules, members who sell NCIs have specific responsibilities conduct due diligence; perform a reasonable-basis suitability analysis; perform a customer-specific suitability analysis; make sure their marketing materials are accurate and not publicly disseminated; maintain appropriate oversight, internal controls, and provide proper training to registered persons who sell the TIC investments.
By: Alex Truitt